The Option Investor Newsletter Thursday 2-3-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 2-03-2000 High Low Volume Advance Decline DOW 11013.40 + 10.20 11079.50 10842.30 1,116,572k 2,071 1,037 Nasdaq 4210.98 + 137.02 4211.06 4085.53 1,714,349k 2,554 1,546 S&P-100 771.96 + 8.04 772.57 755.66 Totals 4,625 2,583 S&P-500 1424.97 + 15.85 1425.78 1398.52 64.2% 35.8% $RUT 521.63 + 11.74 521.63 509.89 $TRAN 2621.59 + 11.93 2629.16 2598.86 VIX 23.72 - 0.66 26.38 23.39 Put/Call Ratio .49 ****************************************************************** A Wild and Crazy Bond Market! Call your insurance agent. You might have whiplash. Both equity and bond markets were all over the board as stock investors tried to figure out what was happening in the bond pits today. The Nasdaq and the Dow saw triple digit trading ranges while the bond markets got crazy and stole the spotlight from the Nasdaq's third largest point gain ever. Fortunately tonight's wrap is not going to be a lesson on everything you always wanted to know about bonds but didn't care to ask. Even so, bonds were the focus today and considering some of the rumors being floated about it was down right exciting (or terrifying) - if you were a bond trader. Let's do a quick recap. Yesterday the Fed raises interest rates by a 1/4 point. Both the Dow and Nasdaq yawn over the expected announcement but the yield on the 30-year bond falls from 6.42% to 6.308%. Asian markets breathe a sigh of relief over the FOMC decision and the Japanese Nikkei rallies 207 points to 19,786. Closer to home Amazon.com announces earnings after the bell, but more Amazon later. Adding fuel to the bond's fire was an announcement by the U.S. Treasury that they would issue fewer long term bonds on top of their newly announced plans to buy back $30 billion in debt. Fast forward to this morning. Europe's Central Bank releases a surprise 1/4 point rate hike pushing interest rates up to 3.25%. Suddenly the rush from institutional investors to buy 30-year bonds (with the newly diminished supply) becomes a flood when crowded with a bevy of European investors looking to U.S. fixed securities after their Central Bank's new rate hike. The price on the 30-year bond spikes open pushing the yield to 6.148%. The buying spree continues and before 10:00 a.m. the yield almost breaks 6% with an intraday low of 6.054%. Some market watchers said they almost felt the panic as bond traders scrambled to buy the long-term notes after the Treasury's announcement last night. Yield on the 30 year bond The bond market had already been in the spotlight ever since we saw the bond yield inversion hit on January 18th. What is a yield inversion? It is when the shorter term notes yield more than the longer-term bonds which traditionally offer the greatest yield. Part of the fervor in the bond markets today was the severity of the yield inversion not only in the 30 yr and 10 yr notes but the 10 yr and 2 yr notes as well. The 30 yr yield closed the day at 6.14%, the 10 yr yield closed at 6.46% and the 2 yr yield ended at 6.54%. The intraday moves on the 30 year bond hit a 3 point range today. This means nothing to those that only trade Internet stocks, but it is a bid deal to bond traders who normally trade in 32nd's. The T-bill actually closed up 2 full points. Okay, I can already tell that some of you option traders out there are yawning. That's okay, it gets better. All of the bond action today was fanned by a red-hot rumor mill. On the top of the list were rumors of one or several large brokerage houses and hedge funds that were bleeding heavily from a short squeeze with this inverted yield curve and rush into the 30-year bond. The rumor was further embellished with word that the Federal Reserve was to hold an emergency meeting to discuss the volatility in the bond market and/or to save some of the larger hedge funds from the carnage. This of course was denied by a Fed spokesperson. Some of the more creative rumors circling the bond pits today were ideas that Friday's employment report had been leaked a day early and that traders were being fired for bad trades and steep losses in their company's portfolio. One rumor even had bond traders being escorted off the trading floor by armed security. You'd almost think they were a bunch of highschoolers passing notes when the teacher's back was turned. Looking at a chart it is hard to imagine that only two weeks ago the 30 year bond was yielding 6.75% and the markets were concerned that we would see 7% soon. Unfortunately, some bond watchers feel that should still be a concern. Everyone knows that the Fed is very likely to raise rates again and quite possibly more than once over the rest of 2000. The economy needs to slow down and the Fed will do anything they can to make it happen. This, some say, has partly been the problem. With the host of new traders recent to the market, Greenspan has helped produce an attitude that the FOMC will save them from inflation. What is a Fed chairman to do? You announce a 25-point rate hike with comments about your stern stance to quash inflation like a bug using your biggest weapon of repeated rate hikes in the future. What sort of response do you receive? The supposedly rate-sensitive tech heavy Nasdaq rallies to within points of a new all time closing high. Not only that, long term interest rates fall out from underneath you. Suddenly the debate turns from how much will the Fed raise next time to how soon should the Fed raise again? The FOMC's next scheduled meeting is set for March 21st. Productivity has still been the economy's savior from encroaching inflation but Alan knows that it can't outpace it forever. In the mean time investors have renewed their hunger for tech stocks. No longer do we look at valuations and interest rate fears but rising revenues and earnings growth. Do tech stocks still have the momentum to outpace the Fed's plan for rising interest rates? Looking at the Nasdaq's chart, the answer is yes. Or is this just another bear trap rally? The news may have focused on the bond market but the Dow saw plenty of volatility on its own. After a quick rally early this morning of +70 points, the ancient index quickly turned over and the selling began in earnest after 11:00 a.m. By 12:30 the Dow hit its low for the day of 10,842 before traders snapped up stocks (mostly tech) to push the average positive again by the close. Only 10 of the Dow 30 stocks actually closed positive today with GE leading the charge +5.18. Others Dow leaders included HWP +2.94, INTC +4.13, and MSFT +2.81. Traders suffered through a 237-point range only to close up +10.24 but still holding the 11,000 level. On the other hand, the Nasdaq was the place to be if you were trading stocks - as usual. Gapping up 61 points, the index managed to stay in positive territory all day despite an 89- point drop intraday. Overall, the Nasdaq saw quite a range adding 137 points (3.36%) and breaking above the 4200 level again closing at 4210.98. The good news today was the market breadth. On the NYSE advancers beat decliners 2071 to 1037 while new highs lost to new lows 53 to 76. The Nasdaq was stronger with new highs beating new lows 188 to 36 but advancers only beat declining issues 2554 to 1546. Volume was strong on both exchanges with 1.11 billion shares trading on the NYSE and 1.699 billion on the Nasdaq. Part of the leadership on the Nasdaq has to be accredited with the likes of AMZN and YHOO along with a host of semiconductors. Amazon.com is truly an amazing story for the new stock market. They lose more money than analysts expect and the stock rockets 21.24% or $14.75 to $84.18 on the news. According to Bezos, AMZN's CEO, the "Earth's most customer-centric company" is doing quite well. Earnings came in last night with a loss of 55 cents a share or $185 million. Last year the company lost 7 cents a share or a scant $22 million. Expectations were low as AMZN recently announced layoffs in their workforce, which didn't bode well for the quarter's performance. Wall Street had expected AMZN to lose 48 cents a share but some analysts were expecting a much worse 58 cents. What powered the stock higher was Bezos' "drive towards profitability". The company offered investors a plan and a goal for AMZN to actually be profitable. Supporting those dreams was a 167% increase in 4Q sales topping estimates with a whopping $676 million from October to December. AMZN now claims they have almost 17 million customers with repeat business accounting for 73% of sales. With a flurry of upgrades and reiterations from brokers and the blessing of Internet analyst, Henry Blodget from Merrill Lynch, AMZN's shares soared. Now that one of the old dogs of the Internet fold regained its "leadership" position, recently beleaguered YHOO caught investors' interest and garnered 9.83% or $32.25 for the day. YHOO looks like it has turned the corner after finding support at $300. Investor interest seemed to be growing towards the close as volume began to pick up. Traders are probably focusing on YHOO's 2:1 split payable on February 11th. Other news today involved the retailers. January sales numbers came in and the results were strong. Retail sales numbers were strong enough to offset any slowdowns due to the harsh January storms. One thought making the rounds was that money withdrawn from consumers accounts in preparation for any Y2K emergencies never made it back to the bank but instead wound up in retailer's registers. Another industry analysts felt the strong January numbers were negative since January is more often thought of as a clearance month and margins were greatly reduced. Wall Street appeared indifferent and only rewarded those with the most stellar of gains. Same store sales were as follows: Wal-mart (WMT) +4.1%, the stock closed -1.13 to $57.25; Sears (S) +1.7%, the stock +0.13 to $31.19; Target (TGT) +5.7%, -1.94 to $66.06; K-mart (KM) +3.6%, +0.13 to $9.00; Federated Department Stores (FD) +4.2%, -1.50 to $41.31; May Department Stores (MAY) +2.3%, -0.44 to $30.31; The Limited (LTD) +9.0%, +1.56 to $34.81, Kohl's (KSS) +8.5%, +3.75 to $77.50, and the Gap (GPS) +11%, +6.06 to $52.88. Retail wasn't the only sale going on. Vodaphone (VOD) finally got approval from Mannesmann AG for what will be the biggest merger in history. Mannesmann's senior officer, Klaus Esser, said he would recommend to his board that they accept VOD's offer of $180 billion. Together they would become the world's largest wireless communications company. VOD shareholders would control a 50.5% stake in the combined company. This had been a previous deal breaker as Mannesmann had demanded a 50% stake in the new company. What can traders expect for tomorrow? There has been some concern that the next couple of weeks is a virtual blackhole for market moving events and news. Earnings are almost over and tomorrow's economic reports are the last major market moving events for the near future. Is the market going to roll over in a bout of post-earnings depression or merely be range bound awaiting the next catalyst to spur investors' fear or greed? The collective masses are still on Fed watch and will probably remain so for the undetermined future as the hawkish FOMC sits perched to act on any sign of rising inflation. Market watchers are already figuring in an 88% chance for another rate hike at the next Fed meeting in March. With nothing on the horizon equity traders may have to look to the bond market for direction. Unfortunately, everyone seems to agree that the volatility in bonds is not over. This means that tomorrow's economic reports could set the tone for the next couple of weeks for both bonds and stocks. Current estimates for the non-farm payrolls tomorrow morning range from 255,000 to 270,000. The challenge is that even if the report comes in near expectations, this tightness in the job market will continue to fuel inflation concerns. What makes tomorrow's report wild card is January employment numbers can vary wildly with seasonal changes. It's common knowledge that the business world tends to beef up their holiday staff November through December and then lay off the extra help in January. Also on our plate for tomorrow is the average hourly earnings numbers. Current consensus puts the gain at 0.3%. To round out our triad of reports is the unemployment rate report. Forecasts are looking for 4.0%, which would be a 30-year low. All of these reports are due out at 8:30 a.m. ET and any of them, if they come in too high or too low, could really move the markets. The good news is it looks like nothing can stop the Nasdaq. At least until it hits the top of its range. It does appear to be range trading. If you are optimistic the top of the range looks like 4340, if you are feeling pessimistic we are already at the top of its range and this is a bear trap about to snap shut. Nasdaq Chart Dow Chart The Dow is definitely stuck in a trading range but if you are bullish it looks like it's almost building an upside down head and shoulders pattern. Plus, it's still in an oversold position. Let's just hope the reports tomorrow are positive or we'll probably be looking at Dow 10,700 again. Good luck and sell too soon. Kimo ********** STOCK NEWS ********** Agency.com: On an Upswing? Agency.com wants to get you on the Internet. Sounds great to me. The experts say the Internet is redefining the way businesses conduct business. E-strategy is key. Agency.com is an international professional services firm, providing clients with an integrated set of strategy, creative and technology services that take them from concept to launch and operation of their Internet businesses. http://members.OptionInvestor.com/stocknews/020300_1.asp ************** Market Posture ************** As of Market Close - Thursday, February 3, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,700 11,250 11,013 Neutral 2.01 SPX S&P 500 1,350 1,500 1,425 Neutral 2.01 OEX S&P 100 730 800 772 Neutral 2.01 RUT Russell 2000 475 500 522 BULLISH 11.12 NDX NASD 100 3,200 3,850 3,851 BULLISH 2.03 * MSH High Tech 1,650 1,900 1,925 BULLISH 2.03 * XCI Hardware 1,300 1,460 1,439 Neutral 1.28 CWX Software 1,200 1,420 1,380 Neutral 1.07 SOX Semiconductor 700 745 870 BULLISH 12.21 NWX Networking 800 900 940 BULLISH 2.03 * INX Internet 700 800 771 Neutral 1.06 BIX Banking 645 690 545 BEARISH 11.30 XBD Brokerage 400 450 428 Neutral 11.30 IUX Insurance 625 650 557 BEARISH 11.30 RLX Retail 950 1,000 920 BEARISH 1.28 DRG Drug 340 400 360 Neutral 1.28 HCX Healthcare 700 790 743 Neutral 1.28 XAL Airline 180 190 130 BEARISH 5.21 OIX Oil & Gas 280 315 269 BEARISH 1.27 Posture Alert A post-Fed meeting relief rally continued Thursday as the NASDAQ posted its 3rd largest point gain ever on volume of 1.7 billion shares. Since Monday (1/31), the Nasdaq has climbed more than 12%. With semiconductor and Networking indices breaking into record territory, we have turned Bullish again across Nasdaq (NDX) and select technology sectors. **************** Market Sentiment **************** Thursday, February 3, 2000 Market Alert! Entering Failed Rally Zones! With equity markets rallying sharply this week following the rebound of the bond market, investors are pouring money back into the game, but take a close look at many of the key market indices: we are back where a potential failed rally may appear. All seems well for now, but remember that we have the January employment report due out Friday (2/4) and the consensus is for an increase in non-farm payroll is for 255,000 new jobs with the unemployment rate dropping to 4.0%. Keep a close eye on this report. If this report come in hotter than expected, it will trigger a precipitous profit-taking sell off and reveal a classic top reversal pattern. What's more, many technicians will point to the fact that many of the key indices are showing lower highs. Not a good sign. To help investors protect their portfolio, we have highlighted below the potential FAILED RALLY ZONES for several of the major market indices. Market Indices Closed FAILED RALLY ZONE DOW Industrials 11,013 11,000 - 11,800 SPX S&P 500 1,425 1,425 - 1,474 OEX S&P 100 772 780 - 800 RUT Russell 2000 522 525 - 540 XCI Hardware 1,439 1,400 - 1,455 CWX Software 1,380 1,380 - 1,425 BULLISH Signs: Corporate Earnings: Major corporate earnings continue to come out strong and ahead of analyst expectations. Cash Flow: The cash that has been sitting on the sidelines has been put to use as of late, as record volumes for the major indexes have been shattered. Short Interest: From a contrarian stand, short interest (JAN-14) on the NYSE is still very high, totaling 3,973,256,735 shares. The short interest on the Nasdaq rose another 2.11% in the latest figures, its fourth consecutive record, to 2,413,628,695 shares. Mixed Signs: Interest Rates (6.153): The current yield is now off of the highs, but any major economic indicator can knock it back to the highs. Currently, there is an inverted yield in the treasury market, which is technically bullish long term. BEARISH Signs: Volatility Index (23.55): The VIX continues to prove that the low 30's are an excellent buying opportunity, and the low 20's continue to be a great selling opportunity. Energy Prices: With the rapid rise in crude oil, everything from manufacturing to transportation will be affected by higher costs. These higher costs will be felt 1-2 quarters out, and could put pressure on profit margins. The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. Pinnacle Index OEX Friday Tues Thurs Benchmark (1/28) (2/1) (2/3) Overhead Resistance (765-785) 1.02 1.59 1.48 OEX Close 738.04 766.89 771.1 Underlying Support (740-760) 0.54 1.25 1.51 Underlying Support (700-735) 18.11 10.38 9.68 What the Pinnacle Index is telling us: In Sunday's letter, we stated that based upon the Pinnacle Index numbers, we would not be surprised to see a relief rally this week on the OEX. Well, we got it. From here, the sentiment is not overwhelming in either direction. Overhead resistance (765-785) is moderately light and underlying support is gaining strength, but is still light. Based upon the sentiment numbers, we do have upside potential, but will most likely be trading range bound. Put/Call Ratio Friday Tues Strike/Contracts (1/28) (2/1) CBOE Total P/C Ratio .60 .45 CBOE Equity P/C Ratio .45 .38 OEX P/C Ratio 1.41 1.05 Peak Open Interest (OEX) Friday Tues Thurs Strike/Contracts (1/28) (2/1) (2/3) Puts 700 / 7,185 700 / 7,748 700 / 8,653 Calls 800 / 6,190 800 / 7,307 800 / 7,273 Put/Call Ratio 1.16 1.06 1.19 Volatility Index Major Date Turning Point VIX October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top 18.13 August 5, 1999 Bottom 32.12 October 15, 1999 Bottom 32.06 January 28, 2000 Bottom 29.09 February 3, 2000 23.55 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Wed Thu Week Dow 11013.44 201.66 100.52 -37.85 10.24 274.57 Nasdaq 4210.98 53.28 111.63 21.98 137.02 323.91 $OEX 771.96 16.22 12.63 -2.97 8.04 33.92 $SPX 1424.97 34.30 14.82 -0.16 15.85 64.81 $RUT 521.63 -8.39 7.52 6.14 11.74 17.01 $TRAN 2621.59 -10.10 4.98 33.03 11.93 39.84 $VIX 23.72 -2.89 -1.38 -0.44 -0.66 -5.37 Calls Mon Tue Wed Thu Week PMCS 229.69 -9.56 25.06 13.69 10.44 39.63 Great week! BRCM 323.56 5.31 7.44 18.69 8.13 39.56 Momentum TQNT 192.00 -7.72 5.59 18.94 14.69 31.50 A leader CMGI 124.50 7.06 2.88 4.06 5.00 19.00 Good timing EBAY 165.00 2.50 0.88 0.06 14.00 17.44 New SNDK 135.06 15.94 1.22 -0.19 0.16 17.13 New NTAP 114.63 1.19 7.44 5.31 1.50 15.44 Poised to go PSIX 95.44 -0.75 6.88 2.31 6.38 14.81 Nice start LLTC 102.00 3.94 3.00 2.50 1.81 11.25 New highs BCE 109.63 3.56 -3.13 7.81 2.75 11.00 New BGEN 102.69 -6.00 8.13 -0.38 8.69 10.44 Catches fire MUSE 172.88 0.31 6.19 -1.00 4.50 10.00 Encouraging MFNX 73.00 2.53 2.50 2.69 0.13 7.84 Squirrelly VOD 61.75 1.38 2.06 4.00 -1.25 6.88 Great play VECO 60.50 -1.13 3.88 -0.44 2.19 4.50 Successful LU 57.00 0.25 0.25 -0.75 1.50 1.38 Do as we say ICIX 46.13 -2.00 1.63 0.19 1.31 1.13 Story here EMIS 38.56 -1.75 1.25 0.00 -0.56 -1.06 Dropped COVD 70.38 -2.44 3.25 -2.88 -0.75 -2.81 Nice bounce FRX 66.00 -1.75 0.81 -1.81 -0.50 -3.25 Holds on PEB 145.50 -15.25 1.25 -4.44 -1.06 -19.50 Dropped SILK 136.00 -14.38 -5.25 -8.25 1.88 -26.00 Bounces Puts GBIX 38.00 -6.31 -1.06 -2.81 -2.94 -7.84 New PGR 60.19 0.13 -0.25 0.88 0.94 -1.94 New UAL 57.94 -0.75 0.81 1.06 -1.06 0.06 Resistance IPG 49.00 -1.00 2.19 0.13 0.69 2.00 Gives clue BBY 52.06 -1.00 1.94 0.06 2.31 3.31 Coming back? ADBE 69.06 -2.50 0.81 5.44 7.75 11.50 Dropped ************ WOMANS WORLD ************ RELATIONSHIPS ARE EVERYTHING - Reviewing bonds, interest rates, yields and VIX. This market just presents a continuous learning opportunity. Just when you think you know how to trade it, something new and weird occurs. I thought a little refresher on the correlation between markets, bonds and interest rates might be appropriate, since it threw my trading today. We will also look at the VIX. First an update. The OEX market order I put in at the close on Tuesday was not filled. I guess I missed the closing cut off. I did not re-enter Wednesday because it was down in early morning and I saw no reason to jump the Fed announcement. My Nasdaq QQQ's did well though. The announcement generated little volatility so I held the Qs till I was stopped out with a decent gain, in the sell-off dip this morning, which was caused by confusion in the bond rates and fed rumors. I really didn't want to give these up, but my stops are pretty tight this week and I did not want to play against my plan. Yesterday I entered small positions in NOK and CSCO for split plays, but I am watching these very carefully. I am looking to enter VERT and INSP for their split plays, when my horoscope says it's the right time to buy. I actually tried to jump back into QQQ but my limit was not hit, as I watched them skyrocket up the rest of the day. (grrrrr!!) Today's 30 yr Treasury bond rate (Long Bond) yield was all over the place. There was a lot of confusion because some are suggesting that the 10 yr bond will replace the 30 yr standard that we traders follow. People get confused when you replace standards. The U.S. Treasury Department auctions these bonds every six months. Long bonds are the most volatile of all government bonds due to their long maturities. Usually, a small change in interest rates causes an amplified change in the underlying bonds' price. The Federal Reserve System basically controls the flow of money in the U.S. It regulates the U.S. monetary and banking system by monitoring the amount of new money printed and released, adjusting interest rates, watching member banks and acting as the government's own bank. The balance of the amount of money in circulation occurs every 6 weeks at the FOMC meetings at which the Fed adjusts interest rates to balance out the rate of inflation while trying to encourage growth. It is a delicate balance. The discount rate is the rate that banks pay to borrow money from the Federal Reserve. Yesterday, the Fed also raised the discount rate. There is also a Fed Funds rate, which is a short-term rate that banks charge each other, to cover short (over night) loans to cover their reserves. If the banks have to pay more money to borrow money themselves, you can bet they will pass the expense on down to you & me and the corporations, the housing markets, etc., etc. Increases in interest rates and in the expense of doing business, eventually causes decrease profits, and of course that affects market sentiment as investors think of the effects on potential earnings. Historically, when interest rates go up, the prices of bonds go down, yields go up and it is bearish for the stock market in anticipation of decreased earnings from the increase in the cost of doing business. Also, when rates go down, bonds go up and the stock market goes up. Bond prices and the stock market usually move in tandem. If the bond yield is low, investors feel their money is better put at risk, playing the market, so there is a market rally. If the bond yield is high, there can be a flight to bonds as a safer alternative to stocks. The low 30 yr bond yield today made techs more interesting, but the confusion in the morning about changing the standard along with a rumor that the Fed was calling an emergency meeting, caused Nasdaq to temporarily tank rapidly. Of course rumors are just that, and once it was dismissed, Nasdaq took off like a rocket as bond yields continued to stay low. I've been stuck with my mouth open all day, realizing I lost my QQQs entered on Monday's Nasdaq correction. That's what happens with tight stops. I kicked the desk, but that didn't help! Part of the confusion today was that there is a divergence in the way the 30 yr bond is acting and how the 10 yr or shorter-term bonds are acting. They usually all move in tandem, but with this "new economy" thing going on, everyone and everything is a bit confused. The Fed raised interest rates yesterday in hopes to keep rates up, thus slowing the economy a bit. Today, long bonds rallied and yields dropped below the short-term rates and Nasdaq rallied. Personally, I have not figured all of this out yet, so I will go with the flow, follow the trend and keep my stops tight. This could be a very good sign or perhaps, another head fake? Darn! Just when I thought I understood the game!! One thing that I will be keeping my eye on the next two weeks is the VIX, or Volatility Index. Since February is typically a sell-off month, I don't know if this February will be different, or if it is soon to take a sharp turn down, just as everyone thinks Christmas is here again. The VIX has been a pretty good indicator of market extremes, if you use the 20/30 figures (see below). The Volatility Index is calculated by taking a weighted average of the implied volatilities of eight at-the-money OEX calls and puts which have at least eight days to expiration and an average time to expiration of one month. Traders look at it as a guide to future volatility and how the price of stock options may be influenced the closer option-expiration approaches. When the VIX is high, it hints that stock option volatility as a whole is high and premiums of both calls & puts are expanded. When the VIX is low, it indicates that stock option volatility is low. OIN tends to use the guidelines of a VIX of 20 or less and 30 or higher as its guide for us to prepare to jump ship or load up. These are not hard and fixed numbers but they are definitely figures to watch carefully. A VIX of 30 has given us some great buying opportunities on lows of the year, in the past. If you recall, the VIX hit over 30 on Monday correlating with Nasdaq's correction. If you bought then, you probably have a nice profit. Notice though, that the trick is making your trigger finger work and buy things, when the market appears to be crashing. The reverse is also true, when things look so rosy that you feel comfortable buying more, the VIX is usually getting lower and could possibly signal a sell-off is approaching, if not already occurring. Keep in mind, with an increase demand for options, the premiums tend to inflate. So, when you find yourself paying more and more for time premium, try to remember to think of the VIX. We want a stable VIX in the mid 20's. I was hoping that after writing this, I would have a feel for the near term market. Unfortunately, I'm still uncertain so I will wait, watch the trend and keep my stops tight. References: DeMark On Day Trading Options by Thomas DeMark, Technical Analysis from A-Z by Steven Achelis and Trade Options Online by George Fontanills Renee White ************** TRADERS CORNER ************** Tech Stocks with Dividends & T-Bills on Steroids If you did well in 1999, you may be starting to have a good problem -- you have too much cash. In fact, you really can't see yourself trading straight calls or straight puts on the scale of your assets. In 1999, I was a gunslinger. I started with 15% of my overall portfolio in options, and I traded that part of my portfolio to huge gains. Now, I am facing a different situation. I'm still a gunslinger, but I only want to play the highly risky straight calls that everyone associates with options in the most favorable periods when earnings and splits give me predictable moves. So, what to do with the rest? Well, my tax accountant suggests that CDs make sense for that part of my wealth that I will have to give back to the government on April 15, 2001, since I succeeded in pushing off part of my tax liability by taking some hefty profits on in the first 5 minutes the market was open in 2000. A CD will pay something like 5%. So will a money market, but there are tax issues which would lead me towards the CD. Is there a way that options can help me to handle this situation? I think so. In 1999, I had 50% drawdowns in my ST options portfolio. That was OK (not really!) -- I was a gunslinger, a Marine, etc, etc. Trading is war. That attitude won't do anymore. Now, I am a fiduciary, someone responsible for management of my own wealth. This is why I am developing a strategy of dividing my capital up into about 3 related pots -- 1. Low Risk Capital & LT Stocks (50% of portfolio). Goal: Compound 5% per month. Strategy: Sell deep OTM Puts on stocks that I want to own, such as BRCM, VRSN & AFFX when the market, sector & stocks become oversold. Sell OTM Covered Calls on LT Stock Holdings when the market, sector & stocks become overbought. Execute in all market conditions. 2. Medium Risk Capital (35% of portfolio). Goal: Compound 10 - 15% per month. Strategy: Sell Naked Strangles (& hedge whichever side is in the money). This is the "conservative" version of Jim Brown's "How to Trade Risky Internet Stocks without Risk" from the first Sunday in January. Execute in all market conditions. 3. High Risk Capital (15%). Goal: 100%+ during each earnings season. Strategy: Straight Calls & Puts. Execute in April, July, November (approximately; for example, start taking call positions mid March). My "focus of effort" is my Medium Risk Capital. (In the Marines, a "focus of effort" was the main unit in an operation; all other units supported that unit, since its success was the key to winning that part of the battle). A 10% monthly return equates to a 213% annual return. A 15% monthly return equates to a 435% annual return. Jim says that you can get 25% monthly returns with the more aggressive versions of the strategy (ie, selling covered straddles, using maximum margin). I prefer to be more conservative and aim lower. If I exceed my expectations in any given month, that is fine. By focus of effort, I mean two things. First, if my efforts in Strategy 1 or 3 distract me too much (eg, if playing straight calls is too demanding), then I just go back to focusing on Strategy 2. The reason for this is that Strategy 2 is the real, long term money maker. With a 12%/month return, I make 310% per year. Compounding that return by two years gets me into the range that I need to be financially independent. Moreover, Strategy 2 is scalable -- that is, I think that I can execute it with larger amounts of money, though, necessarily, I will need to spread the trades over a larger number of stocks. Secondly, my research and analysis efforts are focused on supporting Strategy #2. The key is watching all the indicators & charts every day to determine when the market, sector & stock is oversold/ overbought so that I can sell deep OTM Calls & Puts (on the same stock, where possible). Strategy 3 is my core competency as an option trader. Recognizing the strength in a bullish phase, I want to be able to play earnings and split runs with directional strategies involving straight calls; I also want to be able to play down moves in the market with QQQ and EOX puts. These strategies brought me to the table, but I may have to abandon them in preference of strategies which will allow me to compound my portfolio more reliably. Strategy 1 is the insurance policy that keeps me in business. Did you ever wonder why Microsoft keeps $20 billion in cash on its balance sheet? It is because Bill Gates went through several periods during the early days when he did not know whether he could pay his employees. That taught him an important lesson -- cash on the balance sheet is always good. As a trader in our local group said, the real way to measure your success in trading options is not in how much money you make and keep in your options trading account; it is in how much you put into stable assets like cash and real estate. This is the strategy in which I sell VRSN puts 40 points out of the money with 2 weeks left in a cycle when the market has just put in a major bottom. The return on Strategy 1 may not be very exciting compared to having QCOM Calls when that stock gaps up 150 points, but then again, I will never really have to worry about losing that capital either. Of course, I have to be prepared to buy the stock, but I only sell puts on stocks that I would like to own. In addition, in my LT Stock Account, I have some stock which I have owned since 1998 -- MSFT, VOD, CSCO, AOL, YHOO, HD. My strategy with those stocks was always to hold them for at least 5 -10 years. I sold losers along the way. Of course, MSFT & CSCO do not pay a dividend -- or do they? I am reluctant to part with these stocks, for tax and other reasons. Nonetheless, I started to sell covered calls against these stocks in January at one of the obvious peaks in the market. For example, I sold MSFT Feb 120 Calls when MSFt was at 112. I used the cash proceeds from these calls to buy QQQ Puts to hedge the entire portfolio of stocks in what is known as a costless collar (a true costless collar would be something like the following example -- MSFT stock is at 105; sell the 110 call, and buy the 100 put, thus limiting both the downside and the upside at no cost). I already took the profit on that QQQ Put play, and the put position was of too small a scale to cover the entire downdraft. But it provided some positive cash flow, nonetheless. From this point forward, I do not plan to buy stock (except to hedge a covered strangle in Strategy 2). I plan to purchase any long term shares by selling puts below support on oversold conditions. I don't mind if I never buy a share of stock -- I hope that I read the market, sector, and stock so well that every put I sell expires worthless. I doubt I am that good. Therefore, I diversify my put selling across several stocks and sell OTM puts with varying amounts of buffer zone between the stock and the strike price. In the case where I am put stock, I immediately will start planning on selling covered calls. If I pick good oversold moments to sell OTM puts, my entry points on fundamentally sound technology sector leaders like VRSN, BRCM & AFFX (they will change monthly) will be favorable, and I will probably profit by a rebound in the stock in many cases. When the VIX drops, the indexes go back over their 10 day exponential moving average (EMA), and the stock rallies, I will sell calls 10 to 20 points out of the money. I will do that month after month until the stock is called away. Alternately, I will exit the stock with stop loss orders, but I would prefer not to. Take VRSN for example. It has been one of my LT Stock holdings since Oct99. When it ran up to 210 at earnings in January, I sold Feb220 Covered Calls for 15. That equates to $1500 per 100 shares. The 100 shares were worth $21,000 at their peak. That is like the stock paying a 7% to 10% dividend every month. Of course, the other side of the argument is that I lost over $5000 as the stock slid from 210 to 150 last week. That is a 29% drawdown on the stock. Most serious money managers would find that unacceptable and would sell the stock. I bought the stock at 58, though, and I recognize that it is in a hypergrowth phase characterized by extreme volatility. If I have a very good entry point, I don't mind holding a stock like VRSN. Month after month, I will sell covered calls against it. However, unless I get put to from a short put position, I plan to stay fully in cash as I execute Strategy #1. This may sound like it is highly complicated and beyond the research capabilities of most investors. It does requrie monitoring at all times during the trading day, especially Strategy #2, which requires active hedging and un hedging. But the beauty of these strategies is that they are closely related in the background information needed to succeed. For example, I plan on monitoring a basket of stocks drawn from thestreet.com's Tech30, OIN plays, the Money30 index, and the Wired40 index. I plan on using techniques outlined in Marty Schwartz' Pit Bull to determine oversold / overbought conditions in the market, the sector, and the stocks. Over the last month, I have essentially been training myself to think differently about my options plays. By learning these strategies, I have a broader toolkit to use in a variety fo different market situations. It is like training in the Marines, which was designed to prepare us to fight in all out war, or in peace keeping situations. As part of the cybercorp.com (just acquired by Schwab) website points out, "Trading is War." Though the analogy can be taken too far, trading is a contest of human wills, and the flexibility in thinking and conviction in execution required to be successful is essentially the same. In the last week, I sold my first 3 put positions -- VRSN Feb145 Puts, AFFX Feb 210 Puts, and BRCM Feb 270 Puts. This morning, I closed out 2 of those three (VRSN & AFFX) for a profit, and let BRCM run, since it now has a nice 45+ point buffer from my strike price. In the future, I will let the plays run longer, since time works in my favor in this strategy. But the real adjustment is in mindset. Cash is no longer just cash. It is marginable buying power. It gives the leverage to sell OTM Puts, which can have the same effect as delivering the annual return of a T-Bill every month, month after month. Stock is no longer just stock. It is just a commodity, and I deal in the right to buy or sell that commodity. Volatility in a stock is no longer bad -- it is good, it is the quality which gives high value to the right to buy or sell that stock. Selling that volatility can give a dividend to a non-dividend paying stock like MSFT or CSCO. I don't just buy or sell a stock, I sell the right to buy or sell that stock, and I don't really care if I eventually buy or sell the stock. Interest rates are interesting to me since I will attempt to keep most of my assets in cash, but I am making my own interest rates by using the cash to sell options at critical junctures of fear and greed when those contracts stand the best chance of expiring worthless. I have gone from thinking of myself as the bare knuckled straight call player who fights through the oscillations of an uptrending or downtrending market to thinking of myself as the ninja who moves from point to point silently in the night, making promises to many, yet beholden to none... janar@OptionInvestor.com **** An Osmotic Technical Point of View Why I turn off the Buzzz., Grandma and the Tube Whew! What a ride! Makes bare back bronco riding seem tame (it is really, bull riding is tough). I have not had this much fun since.....hmmm...let me see..oh ya, the last time it did this.... last week? The one thing that I was reminded of whole heartedly in the past few days is that like in real estate, there are three things that are important, location, location, location. With stocks and therefore options, it is price, price, price. If you would have listened to most of the talking heads last week and even this week, the sky had fallen and it would never rise above our knees ever again. That is why I check out MSNBC in the morning for a bit and then turn it off. Trading off you emotions and your gut are entirely different things. This is especially true for you newbies. Spend time on learning how to chart and don't watch too much of the tube. "It will rot your brain" as my grandma used to say. She was right! The charts were actually pointing the way the market was heading. Sure, it is always easy afterward but, take a look at CMGI for instance. It stopped right at $100. A very nice retracement and then the 3 day turned up and we were off to the races. This was an OIN pick. I had trading buddies who were certain that "it" was over. Well it might be any given day but, the prices were not saying so. You can never outsmart the market as the saying goes. But one of the hardest things to do still (at least for me) is when the chart says you have a turn around and it is time to buy, even when everything else is crumbling and you only see mostly red on your screen, is to actually buy. If you can do this, you can be well rewarded. I have been doing some digging that I would like to pass on to those of you who like doing your homework. While everyone has been lavishing attention on the Cable modem arena another area of fast Internet access is DSL. Basically really fast modem speeds over the good old phone line. DSL allows as fast if not faster modem speeds than cable. The phone companies actually had this technology for quite awhile but did not push it. There was actually a single renegade salesman that can take most of the credit for getting DSL out the door (that is another neat story for another day). Dsl and Cable offer the "broadband access" that everyone is talking about. Some of these companies include Aware, Inc. (Nasdaq-AWRE); Copper Mountain Technologies, Inc. (Nasdaq-CMTN), DSL.net, Inc. (Nasdaq-DSLN); InterSpeed; (Nasdaq-ISPD); mPhase Technologies, Inc. (Nasdaq-XDSL); Netopia, Inc. (Nasdaq- NTPA); NorthPoint Communications, Inc. (Nasdaq-NTPT ); Rhythms NetConnections, Inc. (Nasdaq-RHTM); SBC Communications (NYSE-SBC ); and Westell Technologies, Inc. (Nasdaq-WSTL). While some of these stocks do not have options yet, many do. Take a look at the charts and you may just find a gem in there. I happen to be long both ISPD and DSLN. DSLN does have options and ISPD does not as of yet. This whole sector has a lot of room to run as exhibited by their earnings announcements and we could see a doubling or even quadrupling of stock prices on some of the better ones over the next 6 months or so. ISPN just announced earnings increased 395% year over year, not bad. Of course it is a new company, but, this should be indicative of what is to come for the group. Do some digging, there are some nugget in the details. Oh, and when you find them, let me know.... In a previous story I had noted that JDSU is purchasing ETEK for 1.1 shares of JDSU stock for every 1 share of ETEK stock. So, ETEK should eventually be trading at 110% of the JDSU stock price. But in actuality, ETEK has been trading at 90% of the price of JDSU. Here is an update. Someone is beginning to notice! The spread between ETEK and JDSU is closing. They will eventually reach parity and beyond. Well, as one of my favorite all time comics says " I'm not scared". Here is the reason why, head cold medicine. Profits are more ethereal than a politicians promise these days, so, grab them while you can get them. Remember, it doesn't count until you close the trade and the money is in the account. Happy Trading Contact SupportHarrison PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** EMIS $38.56 -0.56 (-1.06) Yawn! If you are looking to cure a tough case of insomnia, we think we may have just the thing for you! Emisphere has turned out to be a sleeper. $40 seems to be providing strong resistance and though EMIS continues to visit this level, it has yet to make a breakthrough. The volume? Hardly worth mentioning other than to say that it has been low enough not to be worth mentioning. Needless to say, this play simply lacks the momentum necessary to retain its position on our play list and therefore, we are kicking EMIS out of our bed. PEB $145.50 -1.06 (-19.50) You can probably take a look at PEB's loss for the week and guess why we are dropping it from our play list. Since we have initiated our play on PEB last weekend, it has been headed south. We have seen strong volume backing PEB's descent this week and though we did see a spike at today's close, it is not enough to convince us that PEB is ready to reverse its recent downward trend. The good thing about this play was the fact that it never even gave us a chance to get on board. There are a lot of possible plays out there and therefore we are going to move on. PUTS: ***** ADBE $69.06 +7.75 (+11.50) Well if you are going to be wrong, then you might as well be REALLY wrong. We jumped right into the teeth of a bear trap on this one as value investors gobbled up shares of this former technology favorite. Educationally, this put play is a perfect example of why we use stops! The rally came out of Merrill Lynch's upgrade to a Near-term Buy from Near-term Accumulate (why do they have to be so complicated, whatever happened to Buy or Sell?). Adobe also rallied on the announced joint project with Shutterfly to build photographic printing technologies for digital images. ******************** PLAY UPDATES - CALLS ******************** MUSE $172.88 +4.50 (+10.00) An encouraging move has occurred for the shares of Micromuse the past two days. Granted, the NASDAQ has been on fire and we certainly would have liked to have seen a bigger move. It appears that MUSE is attempting to break out of its recent trading range to the upside. If this trend continues, look for MUSE to test that resistance level of $184. Most of Thursday's rally in the Internet sector was concentrated in the e-commerce stocks following the Amazon earnings. If the rally broadens out to include the Internet software companies then MUSE should be able to sustain a rally. Yesterday, MUSE added another new client to its stable of Netcool users. Knology is a leading provider of bundled local and long distance telephone, analog and digital cable TV and high-speed Internet access to residential and small business customers in the Southeastern U.S. The news item and market rally helped MUSE to reach a high of $176.75 before pulling back into the close. The loss of momentum was a bit discouraging but we will give MUSE a chance to work its way higher. Support can still be found in the mid-$160's and it is critical that MUSE continues to trade above that level if it is going to make its next move quickly. TQNT $192.00 +14.69 (+32.19) We have remarked several times that Triquint Semiconductor is fast becoming one of the new stock price leaders of its field. The double whammy of being in a strong sector, Semiconductors, and selling to another strong sector, Wireless Communications continues to drive share prices higher. What happens when you pour kerosene on a bonfire? We certainly found out when TQNT not only got shareholder approval for the 2-for-1 stock split payable February 22nd but also authorization to increase shares 800% to give plenty of room for more splits in the future. Possibly adding to the excitement in the shares of TQNT was the company's presentation today at the Banc of America Securities Technology 2000 Conference. We have seen several stocks rally after presenting. Technically, the rally of the past two days has seen a very significant breakout from the trading range consolidation we talked about on Tuesday. Parabolic breakouts tend to slow down after three gap ups. It is impossible to predict how much higher TQNT will go on this run. If you are sitting on big profits you may want to employ a trailing stop strategy. Whether you employ this strategy or not is entirely dependant on your individual risk profile. By closing near its high for the day, look for TQNT to possibly gap up to test the psychologically important resistance level of $200, as long as the overall rally continues. Support can be found all the back down to Wednesday's breakout point in the low $160's. *********************************************** PLAY UPDATES - CALLS - CONTINUED IN SECTION TWO *********************************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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You may also fax the information to: 303-797-1333 DISCLAIMER ********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. 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The Option Investor Newsletter Thursday 2-3-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. ******************************** PLAY UPDATES - CALLS - CONTINUED ******************************** FRX $66.00 -0.56 (-3.25) Drug stocks have been pretty sedated the past two days as the destination for cash seems to be technology and Internet stocks. Not to worry though, FRX has held its own and has not suffered any technical damage. Patience may be our watchword for this play. Drugs might get going again with the announcement that Warner-Lambert has moved back to the negotiating table with Pfizer. In the meantime it needs to be pointed out that FRX is sitting right on top of its uptrend line in the right side triangle formation. The stock needs to hold here if it is going to take off from this very bullish formation. If the stock can hold and rally tomorrow, a bullish position can be considered for a test of resistance at $69. If it can get through that price and make a new high above $71, then FRX may be well on its way to a nice move. VECO $60.50 +2.19 (+4.50) Selling keeps beating back the shares of Veeco as it keeps attempting to stage a significant rally. We are encouraged by the successful attempts to take out resistance at $60. Yesterday's rally up to $64.50 looked like the breakout we were anticipating, but the lack of any follow through was disappointing. We will give VECO another chance due to its decent performance today. Be wary of support holding in the $57.50-$58.50 area. The uptrend is still very well defined. Let's hope yesterday's rally was not a bull trap. The quick selloffs are not surprising considering the overhead resistance dating back three years. There could be a lot of people who have been stuck in this stock for awhile who just can not help themselves to sell when they get close to even despite the strong fundamental story that VECO seems to possess. If we can get these "old" shareholders out of the way, VECO could experience a very nice run. LLTC $102.00 +1.81 (+11.25) Come on Linear Tech! Stop lumbering higher and get parabolic! Wednesday's Play of the Day has moved higher and it did give us a nice entry point on Wednesday under $100, followed by a close above this always critically important price point. With Semiconductor stocks flying the past two days we can not help but to be a little greedy being long one of the groups leaders. While the NASDAQ was screaming in early trading today, LLTC suffered a very discouraging pullback. We can only surmise that there was some big block selling that needed to be absorbed early today before LLTC could resume its move into triple digits. It does look like we got the selling out of the way as the stock closed on the high end of its trading range. We are perfectly happy to be long a stock that has made new highs two days in a row. We need a third to keep our interest in the stock and maybe to peak the interest of some other momentum traders. LLTC has established some very nice short-term support at $97 and is still in a very solid bullish technical pattern. It appears that new positions can be entered on pullbacks that do not violate support. Chasing new high breakouts appears to be a little dicey. ICIX $46.13 +1.31 (+1.13) Slow and steady wins the race, right? At least it worked for the tortoise. Although in this story, the tortoise and the hare are in cahoots. As we have referenced in previous write-ups, ICIX owns over 80% of Web site application hosting company, Digex (DIGX), which IPO'd last July. Today, DIGX reported Q4 earnings and came in $0.04 better than analysts had expected. Digex shares shot up on the news and traded as high as $98.88 closing up over $11. Now you would think that with over 80% ownership, ICIX shares would have been trading at a higher level today, at least above $50, but obviously, this was not the case. Why? Well, roughly 50% of the outstanding ICIX stock is shorted which is extremely high and may lead one to believe the company has some hidden troubles. We do see a nice wedge forming as ICIX consistently tags higher lows and higher highs. We could be poised for a nice breakout but...you see the dilemma. ICIX has a lot of potential to be a great play, but apparently investors are a little leery. This could limit the short-term picture for us but we will give ICIX some time to continue on its way. It is on the right path after all, so we really can't complain too loudly. In the meantime, ICIX's 5-dma ($44.75) is doing a nice job of providing support. The story behind the stock seems to be providing the real resistance. ICIX did trade up to a new 52-week high of $46.81 today. Oh! And lest we forget to mention, we did call the company to try and confirm an earnings date. We were told that there is no date set but they are expecting to announce toward the end of this month. Therefore, we must note the possibility of an earnings run in the near future. PMCS $229.69 +10.44 (+39.63) "It's good to be the king!" and it's good to be a Semi. We can't help but just sit back and smile when we take a look at the last week for PMCS. This has turned out to be a great play and we still have one more week before we will have to cut PMCS loose. For those of you just joining us on this play, PMCS stock is set to split 2:1 next Friday the 11th. We will be dropping this play prior to the actual split to avoid falling victim to a post split depression. Not only is the pending split a likely catalyst for this recent climb, but PMCS is also basking in the glow of being in the right place at the right time. PMCS has been following right along with the red-hot Semiconductor index this week. The SOX traded to a new all time high today, closing up over 44 points at just above 870. PMCS tagged a new high as well, trading up to $141 in today's session. PMCS looks to have encountered some resistance at $140. PMCS could need to retreat some before finding support, the first being $222, backed further by $210. Being that we have seen a gain of nearly $40 since last Friday, there is a chance that we are going to encounter some profit-taking in the near future. We may have even seen the beginning of this with the pullback at today's close. It is imperative that you use your stops to protect your profits! Confirm continuing momentum before making new entries. SILK $136 +1.88 (-26.00) After giving us quite a scare this morning, SILK finally bounced at the 50-dma ($129). If you were willing to take a chance, the low at $125 provided a nice entry point. We had been concerned with the gains in SILK last week, as they had come on rather light volume. Gravity took hold Monday morning, as SILK began its rather dramatic slide. There has just been a shortage of buyers to take up the slack as investors take profits from the prior 2 weeks. Sitting very near support at $129, SILK must prove itself by resuming its move upwards. Volume remains light (50-60% of the ADV), and it will need to pick up if SILK is going to make a serious run upwards. The 10-dma ($150), broken earlier this week will provide the next serious resistance for SILK. If buyers return and help scale this level, SILK could still make a run towards the 52-week high at $177.94. Another bounce near the 50-dma would make for a nice entry, but make sure the buyers are returning. This is the last level of support for SILK before we let it go. VOD $61.50 -1.50 (+6.88) To the victor go the spoils! VOD had run up nicely this week on increasing volume, as investors anticipated a successful outcome to the company's hostile takeover bid for Mannesmann. When the news came out today that the two companies had reached an agreement, VOD opened more than $7 below yesterdays new 52-week high of $63.63. As investors digested the details of the agreement, VOD staged a very nice recovery, coming back to close with a loss of only $1. The all-stock transaction, now valued at over $190 billion, will produce the largest phone business in Europe. With about 10 percent of the world's mobile phone customers, the combined company will also dominate mobile Internet services. VOD will likely continue higher from here, although there may be some profit-taking in the near term. Look to enter new positions on pullbacks as VOD marches further into blue-sky territory. VOD should continue to find support near $58, further supported by the 10-dma at $57.25. More conservative players may want to wait for buyers to push shares through yesterday's high of $63.63 before jumping on board. As always, protect your profits with stops; it would be a shame to give back your profits on such a great play. PSIX $95.44 +6.38 (+14.81) What a nice start to our combined split and earnings play. Moving up first thing yesterday, the move continued unabated this morning. Helped by the strength in the NASDAQ and the Internet sector, PSIX is garnering investor attention again. Focusing on the split set for next Friday, buyers look to be setting their sights on the 52-week high ($107.19), set earlier this month. The company is now reporting that earnings will not be released until the week of February 21st, although the actual date has not been set. PSIX should be supported at the $89 level, with the 10-dma now at $89.50. A drop to this level is buyable, but wait for the bounce. Aggressive traders may want to leg into new positions on continued strength; just remember that nothing moves in a straight lines, and profit-taking is a natural part of the cycle. As we've mentioned in the past before, the key to a profitable trade is a good entry point, backed up by a prudent stop loss. CMGI $124.50 +5.00 (+19.00) We couldn't have timed this call play any better if we'd had a crystal ball. After the rally took hold following the second bounce off $100 on Monday, there's been no stopping the momentum. The money just poured in from the sidelines to buy this stock after traders got the green light from Greenspan yesterday. Prudential also gave their blessing with a Strong Buy reiteration on Tuesday. In addition, the analyst firm raised CMGI's 12-month price target to $216 from $200. Technical resistance, which was at $120, has now become near-term support. Support is firmer at the 5-dma ($115.50). Tomorrow we face overhead opposition at today's new all-time high of $125. Look for intraday pullbacks to get an entry into this momentum play on the climb. Remember to pay close attention to market sentiment in this volatile environment. BGEN $102.69 +8.69 (+10.44) BGEN continues to trade more like an Internet or tech stock that has provided investors with wild swings and volatility. The Biotech company shot up to $99 only to fall to $92 in the first hour of trading today. It began to look as though our play may rollover and play dead. The stock which had helped lead the Biotech sector, was beginning to look and feel pretty sad. The recent news concerning their drug AVONEX was too positive for this to be happening. IMNX and BGEN seem to be doing battle over which company will provide the best drug, for the treatment of multiple sclerosis. IMNX may have won the race today, gaining 13%, but BGEN certainly held its own. After a brief bounce and decline back to $92 again, BGEN caught fire and ended the day +8.69 or 9.2% higher on strong volume of 4.48 million shares. Technically the fact the $92 area held on four different dips the past two days is very positive, as well as the strong volume the last thirty minutes of the session. Support is at $98. NTAP $114.63 +1.50 (+15.44) We mentioned Tuesday that NTAP was in a trading range. The networker is now in the upper end of that range and appears to be poised to break out through the $115 level. Actually NTAP ran smack dab into $115 Wednesday and fell back to $106 late this morning. Buyers came to the rescue, bidding NTAP back up to $114.63 at the close. Closing near its high today is a positive for our play. If you have a position, $112 is an intraday support level for NTAP, which would be a place to move your stops. With the jobs report due out in the morning NTAP and the broader markets could go either way. If we do see a decline to a support area followed by a bounce, you can always re-enter a new position. A good jobs report and NTAP could be off to the races to challenge its high set back on January 21st. NTAP reports earnings Feb 15th and this could be the beginning of a great earnings run. BRCM $323.56 +8.13 (+39.56) The momentum of our split run play continued the past two days. BRCM gained over $26 while coming within $2 of its high set in the middle of January. BRCM is in the right sector, at the right time and has a split approaching so we believe the chip company will continue higher. Volume the past two days has been strong. According to William Ruehle, Broadcom's CFO, BRCM products are in 90% of cable set- top boxes shipped. With that news hitting the markets it's no wonder investors want to own a piece of this rock. If you have a position in our split-run play, support is found at $320 and $310. BRCM split 2-for-1 a week from Monday, so we have plenty of time for this play to continue. COVD $70.38 -0.75 (-2.81) Our play in COVD got off to a bit of a rough start. For those wanting to target shoot, a bounce off the $68 area early this afternoon may have provided a good entry point for this play. If you did enter COVD, use that support level as a guide for staying with the play. We believe COVD will begin to climb back up, as the recent support from analysts should provide some strength for this play. COVD has drifted lower for most of the past two sessions but the volume has been very light, indicating the decline is probably just profit- taking. Earlier this week COVD announced the availability of its DSL services in Richmond and Norfolk Virginia. COVD is aggressively building its presence in metro areas across the United States and we believe this pullback really should be viewed as a buying opportunity. MFNX $73.00 +0.13 (+7.84) While $62 seems to be providing rock- bottom support, $66 has worked pretty well, and $70 has held since Tuesday. However, true to form, with no volume and a lack of news, MFNX remains squirrelly. The low volume also translates to lack of upward pricing pressure. A breakout over $75 with volume is really what MFNX needs, but that will only come with an event on the horizon, like earnings for instance. We are still waiting for IR to confirm an earnings date, but it won't likely occur before February 15. If you are adroit at herding cats, you might be able to nail a great entry at one of the above levels of support, thought our best suggestion is to wait for the $75 breakout. If you do that, just make sure the market is trading in your favor. Until we have an earnings date, MFNX may continue to drift like a superball in zero gravity. Even then it will be subject to move without relation to the rest of the market until an event or volume provides the gravity necessary for a sustained rise. We're not saying "don't play". Just know the risks. In case we forgot to mention it, MFNX is a split candidate from $55- $85. LU $56.50 +1.00 (+1.38) Do as we say and we'll let you live - that's the message we should be sending LU tonight. Ever since finding a bottom following a crummy conference call at earnings, LU has been asleep on the job, though it should be offering a prayer of thanks for the $1 gain in today's last hour of trade. Otherwise we'd be carrying LU out in a pine box tonight. That said, we need to see LU punch through near-term resistance of $58 with strong volume. If there is any good news, it's that LU found support at its 10-dma of 55.31. While it doesn't look like it will drop much from here, if at all, the $64 K question is will it go up? Yes, but only if volume pushes it there. Volume is the key. LU is a conservative stock that will allow you to sleep at night, but without a price advance tomorrow borne of volume at least 20% over the ADV, it won't make us any money. It is a bit more rare that we offer this suggestion, however you may want to consider a limit/buy order as your target rather than the resistance outlined above. ******************* PLAY UPDATES - PUTS ******************* BBY $52.06 +2.31 (+3.31) BBY may be coming back to life. Whether the catalyst is the benign decision from the FOMC meeting yesterday, or the company's announcement of an increased stock buyback, we need to exercise caution. Bouncing strongly at support ($48) early yesterday afternoon, BBY saw buying interest pick up into the close. Gaining ground again today, our put play made it onto the probation list, pending the outcome of the battle between buyers and sellers. The battlefield is centered near $52, the convergence point of the 30-dma ($52) and the 50-dma ($52.44). If BBY rolls over from here, then it is an entry point. A break through this level to the upside will indicate that buyers have returned and will spell the end of our play. UAL $57.94 -1.06 (+0.06) Yesterday we saw a charge through the 10-dma on strong volume in the afternoon session. The close above this technical indicator warned of a pending revival. As it turned out today, the 10-dma proved to be overhead resistance. The multiple bounces off this mark intraday provided the ultimate validation. However $56.56 is holding firm as near- term support and this relative strength is discouraging. UAL needs to weaken and penetrate this opposition or we'll be heading for greener pastures. There's no real news out there to push the stock down. Although it was mentioned on the wire that UAL will spend $70 mln to add more legroom for its coach flyers. The company will remove 7200 seats from 707 planes to provide customers with three to five more inches of space. IPG $49.00 +0.69 (+2.00) Bounce it did! IPG followed its recent pattern of a few days down followed by a few days up. Overall IPG should now begin to trend lower. The clue? During its attempt to climb higher the past few days, IPG consistently hit a wall of resistance at the 10-dma (now at 49.21). Plus the volume levels remained moderate further signifying that there is not much in the way of power behind this rally. Bottom support still remains at Monday's intraday low of $45.25. Because IPG couldn't move through the 10-dma this level now serves as a new entry point. Yet the more conservative trader may want to wait for a descent to the 5-dma ($47.70) for better confirmation. ************** NEW CALL PLAYS ************** EBAY - eBay Inc $165.00 +14.00 (+17.44 for the week) eBay is an Internet auction service in which users buy and sell personal property. The sellers pay a fee to have heir items placed on the company's Web site and the buyers get to browse and make bids on the merchandise. If an item sells, eBay charges the seller a percentage of the closing price. The company's rivals in the auctioning arena are Yahoo! and Amazon.com. We see EBAY emerging as a powerful momentum play. With the Fed's expected rate hike of 25 basis points now behind us, the runway is clear for interest-rate sensitive stocks to take off. The delivery of a solid earnings' report from Amazon.com (AMZN) also helped traders cozy back up the these high-flying Internets. AMZN's "focus on profitability" further reminded investors that the e-tailing business model does work. Retracing a bit to January 26th, EBAY rose a sharp 11.7%, or $16.06 but slammed into previous resistance at $158.75. The spike was in response to its delivery of solid 4Q earnings at $0.04 p/s which beat estimates by a significant $0.02! Of course there was a slew of positive analyst comments to boot. Robertson Stephens, Lehman Brothers, and DLJ all reiterated a Buy recommendation with the latter firm "calling EBAY a core Internet holding and saying it should outperform much of the Internet sector for the year". Two days later Paine Webber started coverage with a Buy rating citing eBay is "fundamentally changing the way transactions take place tend to be the best investment opportunities as these business models are based more on technology and software platforms, rather than fixed assets". The firm also issued a $225 price target. Nonetheless, EBAY channeled primarily between $145 and $155. The current changed today. EBAY's increased volume and importantly the break through near-term resistance of $158.75, signaled to us the start of a potentially profitable run. The stock's close above it's 5-dma ($152.91) and 10-dma ($149.69) as well as its finish in the proximity of the intraday high at $166.38 further characterizes a bullish sentiment. Today too W.R. Hambrecht commented that eBay "represents a truly unique business that cannot be easily replicated online and is, for all intents and purposes, impossible to replicate offline" and initiated a Market Outperform and a $225 price target. If we follow the cliché that old resistance become new support, then look for EBAY to make itself comfortable at $158 and $160 on a pullback. I know many of you have heard this before, but a reminder never hurts. Any Internet play is HIGH-RISK and VOLATILE so please proceed with caution. It's also important to know your tolerance for wide intraday swings. Use stops carefully. In a recent partnership with eBay, China.com (CHINA) announced it will promote eBay Chinatown to Internet audiences throughout Asia. Today eBay came under scrutiny for allowing Ku Klux Klan- related products on its site. This follows earlier criticism of the sale of Nazi items that can be obtained on the auction site. eBay spokesman Kevin Pursglove responded that the company is "very much aware of some of the criticism that has been raised about many of these items, but eBay doesn't want to play the role of censor". BUY CALL FEB-160 QXB-BL OI=1704 at $12.00 SL= 9.50 BUY CALL*FEB-165 QXB-BU OI= 717 at $ 9.13 SL= 6.75 BUY CALL FEB-170 QXB-BV OI=1734 at $ 7.13 SL= 5.50 BUY CALL FEB-175 QXB-BX OI=2122 at $ 5.63 SL= 4.00 BUY CALL MAR-170 QXB-CV OI= 151 at $15.75 SL=12.25 BUY CALL APR-175 QXB-DX OI= 164 at $14.13 SL=11.25 Picked on Feb 3rd at $165.00 P/E = 2895 Change since picked +0.00 52-week high=$234.00 Analysts Ratings 9-7-6-0-0 52-week low =$ 64.00 Last earnings 01/00 est= 0.02 actual= 0.04 Next earnings 04-24 est= 0.03 versus= 0.04 Average Daily Volume = 3.34 mln /charts/charts.asp?symbol=EBAY **** BCE - BCE Inc. $109.63 +2.75 (+11.00 this week) BCE is Canada's largest communications company. Through its operations in communications services, BCE provides residence and business customers in Canada with terrestrial and wireless communications products and applications, satellite communications and direct-to-home television services, systems integration expertise, electronic commerce solutions, Internet access and high-speed data services, and directories. Abroad, through Bell Canada International's investee companies, BCE provides communications services to more than 6 million customers in Asia and Latin America. BCE also has an extensive international presence through its 39% ownership of Nortel Networks, a network designer and builder of communications networks, as well as through Teleglobe, an international telecommunications carrier. Don't let the Canadian part fool you. This play is really about Nortel Networks in which BCE is about to spin off 95% of its ownership, or 39% of Nortel as a dividend to BCE shareholders. Here's the math. BCE has a market cap of about $63 bln. NT has a market cap of about $127 bln. With a 39% interest in NT worth about 50 bln., the market is valuing the remainder of BCE at only about $13 bln. The intent of the spin-off is to further unlock the value of BCE, which also own 80% of Bell Canada, Canada's largest phone company with over $9 bln in sales. For every share of BCE owned, shareholders will receive .78 shares of NT (for every $100 of BCE, shareholders will get the equivalent of a $78 dividend in the form of NT shares). In short, BCE is way too cheap and should be considered a value/arbitrage play based on Nortel's growing value, and the market's realization that the remainder of BCE is more valuable too. Technicals look great. Volume is rising. So is the price. Today, BCE set a new high on volume approaching two times the ADV of 731K shares. On the chart, BCE has been channeling up with higher lows and higher highs. If channel history repeats itself, there is a strong likelihood that BCE will fall back to the $102 to $105 range, which would also make a good target at which to shoot. News that the spin-off is official should provide a bit more zip to the issue, which puts our bias at $105 rather than $102. Otherwise you can pick your own target, or wait for another volume swell to carry BCE over $110. The news is above, but note that Merrill last week raised their rating from Accumulate to near-term Buy. BUY CALL FEB-105 BCE-BA OI=223 at $6.13 SL=4.25 BUY CALL FEB-110 BCE-BB OI=621 at $4.63 SL=2.75 BUY CALL FEB-115 BCE-BC OI=105 at $2.69 SL=1.25 BUY CALL MAR-110*BCE-CB OI=215 at $8.63 SL=6.50 BUY CALL MAR-115 BCE-CC OI= 2 at $6.50 SL=4.75 low OI Picked on Jan 16th at $109.63 P/E = 19 Change since picked +0.00 52-week high=$109.88 Analysts Ratings 4-4-0-1-0 52-week low =$ 38.31 Last earnings 01/99 est= N/A actual= N/A Next earnings 04-00 est= N/A versus= N/A Average Daily Volume = 731 K /charts/charts.asp?symbol=BCE **** SNDK - Sandisk Corp. $135.06 +0.16 (+17.13 this week) What's in a name? SNDK provides computer storage sans disk. The company is a leading provider of flash memory storage devices - integrated circuits that retain data when power is off. The company is involved in all aspects of flash memory process development, chip design, controller development, and system-level integration. SNDK has customized its products to address the needs of many emerging applications in the consumer electronics and industrial/communications markets, including digital cameras, smart phones, personal digital assistants (PDA), and MP3 portable music players. Benefiting from the tremendous growth in demand for storage for portable electronic devices, SNDK has been marching steadily upwards since early January. Announcing stellar earnings on January 26th, the company further rewarded its investors by announcing a 2:1 stock split payable on February 22nd. Jumping up sharply on the split news, SNDK has spent the last week banging its head on resistance at $137. Intra-day support is building at $129 with stronger support found near the $120 level. Volume this week has remained well above the daily average of 925 K, and with the intra-day lows moving higher, SNDK may be ready to break out to new highs. As long as volume remains strong, a break through resistance is buyable as is any bounce near $129. With over 2 weeks until the split takes place, there is not a lot of time left for entry points and a breakout over $140 should be considered for an entry. Sandisk continues to improve its market position, announcing today that it will supply CompactFlash memory cards for the new Hewlett Packard PhotoSmart C618 and C912 digital cameras. Nelson Chan, senior VP for marketing at SNDK said, "HP's decision to use SanDisk CompactFlash memory cards in its most advanced digital cameras demonstrates the capability of the SanDisk CF card to support not only high-resolution image storage, but also next generation features such as continuous shooting and audio recording.". BUY CALL FEB-130*SWQ-BF OI=272 at $13.88 SL=11.25 BUY CALL FEB-135 SWQ-BG OI= 11 at $11.25 SL= 9.00 low OI BUY CALL FEB-140 SWQ-BH OI= 89 at $ 9.13 SL= 6.75 BUY CALL MAR-135 SWQ-CG OI= 0 at $19.50 SL=15.25 Wait for OI BUY CALL MAR-140 SWQ-CH OI= 16 at $17.63 SL=13.75 Picked on Feb 1st at $135.06 P/E = 139 Change since picked +0.00 52-week high=$140.38 Analysts Ratings 1-3-0-0-0 52-week low =$17.00 Last earnings 01/00 est= 0.22 actual= 0.30 Next earnings 04-26 est= 0.26 versus= 0.15 Average Daily Volume = 925 K /charts/charts.asp?symbol=SNDK ************* NEW PUT PLAYS ************* GBIX - Globix Corp. $38.00 -2.94 (-7.84 this week) Globix Corporation is a leading provider of Internet connectivity and advanced Internet services for businesses in the United States and Europe. Through its high-speed, fault-tolerant, fiber-optic network and state-of-the-art Internet Data Centers in New York City, Santa Clara, and London, Globix delivers superior reliability, security and performance to companies using the Internet to deploy mission- critical business strategies. Cutting-edge applications include Co-Location, Web Hosting, Dedicated Access, Streaming Media, E-Commerce and Internet Security. Too much, too fast looks to be the culprit in this case of stock decline. Allow me to recreate the scene. Globix Corp. had spent a good deal of time trading in the $10 (split adjusted) neighborhood before a combination of good news, a 2:1 split announcement, and some strong backing from various analysts had the shares moving upward. GBIX stock split 2:1 before the open on December 31st and just ten days later, GBIX announced yet another 2:1 split. On January 12th, GBIX announced plans to seek approximately $250 million in a private offering of Senior Notes. All of this news had GBIX moving up rapidly until last week, when the first hole in the bubble appeared. It was time for GBIX to announce earnings after the close on January 27th. GBIX came in 14 cents per share under analysts expectations. GBIX closed down just over $11 the following day and before GBIX had the chance to find its feet, the second 2:1 stock split occurred before the market open on February 1st. Now GBIX is trying to recover from a classic case of the post split blues times two and a sour earnings report. Ouch. Needless to say, we are betting that there is more downside to come in this story. GBIX has violated a good deal of support in a relatively short period of time and is now looking up at some rather formidable looking resistance at $43, $44 and $48. Near term support is harder to peg for GBIX, largely due to GBIX's rapid ascent in anticipation of the splits. The $38 level did try and provide some weak support today, and if you will notice GBIX did close right on that number. Watch for GBIX to trade through. The next support level looks to be right around $30. We saw volume 4 times the daily average backing today's nearly 3 point drop, a good indication that there are plenty of investors looking to dump their shares of GBIX. It looks like the bulls that have been running GBIX have some tired feet and are willing to turn things over to the bears for bit. BUY PUT FEB-45 GUI-NI OI=0 at $6.63 SL=4.75 BUY PUT FEB-40*GUI-NH OI=8 at $3.63 SL=1.75 Average Daily Volume = 509 K /charts/charts.asp?symbol=GBIX **** PGR - The Progressive Corporation $60.81 -0.94 (-1.94 this week) In business since 1937, Progressive is one of the nation's largest auto insurers. Progressive offers all types of vehicle insurance and property-casualty insurance through 30,000 independent agencies, the Internet and through affiliate programs. PGR is a holding company for 82 subsidiaries. PGR also has one mutual insurance company affiliate. When we last visited PGR in December we noted that the stock was dropping due to concerns about an increase in property claims following Y2K "disasters". January 1st has come and gone, there were not any riots and the stock is still going down. There has to be some underlying problems. One problem is the macroeconomic event of higher interest rates. By being one of the largest insurers of automobiles in this country, PGR is particularly vulnerable to a slowdown in the purchase of high ticket items like automobiles. Exactly what the Fed is targeting. To add misery to the company's interest rate woes was the earnings report announced on January 25th. PGR reported a 95 percent drop in fourth quarter operating profits, substantially below analysts estimates. The company blamed a huge increase in automobile claims from the damage caused by Hurricane Irene. Operating income was a paltry $.06 per share vs. $1.38 a year ago. The Street was looking for $0.21. After the earnings Prudential initiated coverage with a Neutral rating (why bother, hardly a ringing endorsement). You would be hard-pressed to find a stock in a more well defined downtrend than Progressive. Guess we should have recommended leap puts back in December. New put positions could be placed as long as PGR does not take out any previous day's high. If that happens, a little patience may be order to see how far the stock will bounce. Failure to take out resistance may be a good opportunity to put on a bearish position on this stock that seems to be heading lower. BUY PUT FEB-65*PGR-NM OI= 283 at $5.75 SL=4.00 BUY PUT FEB-60 PGR-NL OI=1205 at $2.25 SL=1.25 BUY PUT MAR-60 PGR-OL OI= 104 at $3.63 SL=1.75 Average Daily Volume = 380 K /charts/charts.asp?symbol=PGR ********************** PLAY OF THE DAY - CALL ********************** VOD - Vodaphone AirTouch $61.50 -1.50 (+6.88 this week) Formed when the UK's Vodaphone Group bought US wireless provider AirTouch Communications in 1999, VOD operates mobile phone networks offering voice messaging, paging, and data services. With the most mobile phone subscribers in the world, (31 million and rising), VOD is a giant in the world of wireless phones, holding the #1 position in the UK and the #2 position in the US. The company continues to expand at aggressive pace, having agreed to combine with US wireless carrier Bell Atlantic, and still pursuing its takeover bid for Germany's Mannesman. Sunday's Write Up Reminiscent of watching two 5-year olds argue over their favorite toy, the endless bickering between VOD and Mannesmann is becoming tiresome. We're glad it will be over one way or the other when VOD's buyout offer expires on February 7th. The VOD management team continues to woo Mannesmann shareholders, but no amount of concessions seems sufficient to coerce the Mannesmann management team to abandon their go-it-alone strategy. The latest maneuvering has Mannesmann trying to build alliances in the internet world; making the case that Mannesmann is also an internet company, while VOD has no internet presence (see news below). All of this wrangling has had little affect on VOD shares, as they trade between $54 and $58 on average volume. Entries can still be considered when prices bounce off of support at $54, but more conservative investors may want to wait for a convincing break through the upper end of this trading range. VOD will likely remain rangebound until the resolution to this battle becomes apparent. This will likely continue to be a news-driven play, but general market weakness could still torpedo our play. As such, play with caution, and keep your stops in place. Concerning speculation about a deal with AOL, Mannesmann confirmed that integrated online services play a key role in the company's strategy, and that they have been talking to several different Internet companies about possible collaboration. Also on Friday, Mannesmann announced a joint venture with Deutsche Bank, launching a new European service that turns phones into personal bank tellers by combining telephone and bank accounts. Mannesmann hopes the venture, called Tele-Commerce Bank, will bolster the company's e-commerce strategy and strengthen its defense against VOD's $156 billion hostile takeover bid. Tuesday's Write Up To the victor go the spoils! VOD had run up nicely this week on increasing volume, as investors anticipated a successful outcome to the company's hostile takeover bid for Mannesmann. When the news came out today that the two companies had reached an agreement, VOD opened more than $7 below yesterdays new 52- week high of $63.63. As investors digested the details of the agreement, VOD staged a very nice recovery, coming back to close with a loss of only $1. The all-stock transaction, now valued at over $190 billion, will produce the largest phone business in Europe. With about 10 percent of the world's mobile phone customers, the combined company will also dominate mobile Internet services. VOD will likely continue higher from here, although there may be some profit-taking in the near term. Look to enter new positions on pullbacks as VOD marches further into blue-sky territory. VOD should continue to find support near $58, further supported by the 10-dma at $57.25. More conservative players may want to wait for buyers to push shares through yesterday's high of $63.63 before jumping on board. As always, protect your profits with stops; it would be a shame to give back your profits on such a great play. BUY CALL FEB-50 VOD-BJ OI=3254 at $12.13 SL=9.50 BUY CALL FEB-55 VOD-BK OI=2501 at $ 7.63 SL=5.75 BUY CALL FEB-60 VOD-BL OI=5101 at $ 4.38 SL=2.75 BUY CALL APR-55*VOD-DK OI=2121 at $11.00 SL=8.75 BUY CALL APR-60 VOD-DL OI= 706 at $ 7.88 SL=6.25 Picked on Jan 18th at $57.50 P/E = N/A Change since picked +4.00 52-week high=$63.63 Analysts Ratings 3-3-2-0-0 52-week low =$33.21 Last earnings 12/99 est= N/A actual= N/A Next earnings 06-08 est= 0.42 versus= 0.34 Average Daily Volume = 3.90 mln http://OptionInvestor.com/charts/charts.asp?symbol=VOD ************************ COMBOS/SPREADS/STRADDLES ************************ Bond Market Blues.. Wednesday, February 2 The markets paused for a day of consolidation as the Fed raised interest rates by a quarter of a percentage point and forecast more inflation-taming rate hikes in the future. The Dow Jones Industrials closed down 37 points at 11,003, capping a two-day recovery. Technology stocks advanced during the session, driving the Nasdaq Composite Index 21 points higher to 4,073. The S&P 500 Index was unchanged at 1,409. Advancing issues led declines 16 to 13 with 1.03 billion shares traded on the NYSE. New lows outpaced new highs 128 to 35. The benchmark long bond surged 1-27/32, with the yield falling to 6.29%. Tuesday's new plays (positions/opening prices/strategy): Pfizer PFE MAR40C/FEB40C $0.62 debit calendar Covance CVD FEB12CC/12NP $12.25 debit covered-combo Pennzoil PZL APR10C/FEB12C $1.81 debit diagonal Portfolio plays: Today's market was dominated by the anticipation of a change in interest rates. The central bank's rate-setting committee avoided the 50-basis-point spike that many analysts had feared, but put investors on notice for future increases by warning that inflation was the biggest threat to the booming economy. Traders accepted the move without malice and analysts commented that technology stocks will continue to rally despite a rising interest-rate environment. The big winner in our portfolio was Triquint Semiconductor (TQNT). Today the stock leaped $19 after company officials announced that stockholders approved an increase in TQNT's authorized shares. As a result, TriQuint will effect a previously announced two-for-one stock split in the form of a stock dividend. Our bullish position at $140 is expected to finish at maximum profit. Another big mover was BCE Incorporated (BCE). The Nortel Networks (NT) parent rose almost $8 after shares in Nortel jumped in late trading. Rumors of higher-than-expected growth in the firm's red-hot fiber-optic network gear sector and a re-weighting on the Toronto Exchange helped boost the issue. BCE recently said it planned to spin off 94% of its stake in the company and any rally in NT will benefit the parent company. Our bullish debit spread (FEB75C/85C) returns maximum profit above $85. A number of Internet and semiconductor stocks rallied during the session and our top performers were well-known issues. Emulex (EMLX) fought back from recent losses to finish $6.43 higher at $106.62. The cost basis in our recent covered-combination is near $95. Siebel Systems (SEBL) is another slumping issue that appears to be making a comeback. Today the stock rallied $6 to close at $96.31 after a bullish forecast at the Banc of America Securities Technology Week 2000 conference. Our debit position (FEB85C/95C) achieves maximum profit above $95. Industry leading Motorola (MOT) was in the news and on the leader board with an $8 move to $144. The telecom giant made it easier to shop on the move by unveiling the market's first secure virtual credit card solution for making online purchases from mobile phones. The system combines virtual credit card technology from Trintech for secure and convenient online purchasing with wireless devices. Our LEAPS/CC's position (LJAN105C/F135C) has doubled in value since its inception last fall. Adobe Systems (ADBE) was Wednesday's big surprise, rising $5 to a recent high near $61. Unfortunately, the position is one of the few that has yet to reach profitability. This new rally may be the beginning of the end of that dilemma. British-based mobile phone company Vodafone Airtouch (VOD) closed above the $60 level, a new all-time high on news the merger with Mannesman may be coming to a favorable conclusion. A successful pact would end a three-month battle for dominance of mobile communications in Europe. The most difficult decision with this position is whether to initiate an upside adjustment, based on recent gains, or wait for the final announcement. The original position (LJAN45C/FEB50C - $7.75 debit) is profitable but begins to lose potential above $55. It may be best to simply wait for the final outcome and hope the stock does not continue much higher in the short-term. Another candidate for roll-up, General Motors (GM) slid almost $4 today after officials at the company said Chairman and Chief Executive Jack Smith will step down. The move provided us a brief respite from the need to contain an upside break-out. Now it appears the issue will remain in the $80 range, an area that provides maximum profit in our long term position (LJAN75C/FEB80C). Thursday, February 3 Financial stocks and blue chip companies fell amid instability in the Treasury market while technology issues powered higher. The Dow rose 10 points to 11,013, rebounding from losses early in the session. The technology-heavy Nasdaq Composite rocketed 137 points to end at 4,210. The broader S&P 500 Index was up 15 points to end at 1,424, the highest level since January 24. Advancing stocks outpaced declines 2 to 1 on the Big Board. The NYSE recorded more than 1.11 billion shares traded with 69 stocks hitting new highs and 79 at new lows. The 30-year bond was up 1-31/32, dropping the yield to 6.14%. Portfolio Plays: It was another booming day for technology issues and the majority of stocks in our portfolio moved higher with the group. The big winners were all market-leading issues and the top performer was Siebel Systems (SEBL) with an incredible $9 rally. The move comes on the heels of a recent slump and appears to be in anticipation of their quarterly earnings report, due out next week. Today the company announced a deal with i2 Technologies (ITWO) to provide an unmatched B2B solution that is intended to enable companies to gain a powerful complementary suite of customer management and fulfillment solutions. Apparently investors were in favor of the pact. Another big mover was Emulex (EMLX), climbing $5 to $111.50 in a third consecutive day of gains. Our new covered-combination profits with the stock above $95. Lets hope the rally continues. A number of long-term issues also participated in today's rally. Motorola (MOT) was again the dominate stock in the portfolio, rising $8 to a recent high at $152. The move followed news the company had signed a $1.5 billion contract with Turkish wireless phone system operator Telsim to expand its wireless telephone network. Under the three-year contract, which Motorola said was its largest such deal, Motorola will provide infrastructure, handsets and services for Telsim's global wireless system. The $1.5 billion includes about $100 million worth of Web-enabled handsets, which allow users to access the Internet from wireless phones. Adobe Systems (ADBE) continued its ride on the comeback trail, climbing almost $8 to end just below $70. Today the stock was upgraded to intermediate-term BUY by Merrill Lynch analyst Jay Vleeschhouwer. The new price target is $90 and that suits us just fine. Vodaphone (VOD) finally announced that Mannesmann AG of Germany has agreed to their $160 billion offer in a deal the two companies are calling a merger. The companies are expected to announce a pact in which Mannesmann will control 49.5% of the merged company, while Britain's Vodafone, the world's largest mobile communications company, will control 51.5%. Based on the news and today's quick rebound from an opening slump, we decided to adjust our bullish LEAPS/CC's position one strike higher and out to the month of March. The move required an additional debit of $2 but provides $3 of new upside potential. Our target price for the stock is now $55 (or above). Small-cap issues continue make incredible gains in the current market environment and the big surprise in today's session was Tekelec (TKLC). Shares in the telecom company jumped over $6 to a new all-time high near $32 after they posted quarterly earnings of $0.20 a share, beating the consensus estimate of $0.18. Our bullish debit spread at $22.50 is at maximum profit and should be closed to protect gains. There were a number of other leaders in the low-priced stocks and the most impressive were Silicon Valley Group (SVGI), up $1.56 to $24 and P-Coms (PCMS), up $1.88 to $17. Both of the diagonal spread plays on these issues have offered multiple early-exit opportunities and we will continue to adjust the positions higher to retain profits. Key Energy Group (KEG) reached $10 during the session and that bullish position; JUL7C/FEB10C is also expected to return maximum profit at February expiration. There was some bad news in the portfolio today. Telephone service and equipment provider World Access (WAXS) and STAR Telecom (STRX) have agreed to trim the value of their merger deal. Under the new terms, World Access will pay between $7.50 and $8.00 per share of the global telecommunications service provider stock, down from $10.50 when the deal was first announced last year. The statement said the two companies agreed to lower the deal's price tag after further review showed that significant capital will be needed in the near term to deploy an expanded sales force and invest in technology in Europe, where the combined company plans to focus its efforts. Our position fell to the break-even point on the news but fortunately, we have a few months of time value in the long option and the eventual outcome will be profitable. Questions & comments on spreads/combos to Click here to email Ray Cummins ********* NEW PLAYS ********* DLX - Deluxe Corporation $29.00 *** New IPO! *** Deluxe supplies paper-based and electronic payment and information solutions services and payment protection and risk management services to the financial and retail industries. Deluxe provides check printing, direct marketing, customer database management and related services to financial institutions through subsidiaries that include Chex Systems, Deluxe Payment Protection Systems, NRC Holding Corporation, Deluxe Data Resources, FUSION Marketing and Deluxe MarketWise. Deluxe provides electronic transfer processing and software through Deluxe Electronic Payment Systems and markets and sells specialty business papers, greeting cards, gift wrap and related products through its Current and PaperDirect subsidiaries. In addition, Deluxe has formed a joint venture called HCL-Deluxe with HCL of India to provide products to the financial industries in India and the United States. On Monday, Deluxe reported that fourth-quarter earnings rose by a better-than-expected 11% as net income edged higher to $58 million or $0.79 a share. The consensus of analysts' estimates was $0.74. The big news came in the form of plans to combine and spin off two of its technology-related business units. Under the spin-off plan, Deluxe will merge eFunds, its electronic payments and services unit, with iDLX Technology Partners, which provides information technology and related services to financial services companies. The businesses will become an independent, publicly traded company called eFunds. Deluxe said it intended to sell a minority interest in eFunds through an initial public offering in May or June. After the announcement, Salomon Smith Barney upgraded the company to a BUY with a target of $41, based on the e-funds spin off. The brokerage commented that separating the companies into two pieces is an appropriate avenue to follow, given that the two units are worth a minimum of $36. With that kind of fundamental assessment, this position offers a high probability of profit with relatively low risk. PLAY (conservative - bullish/diagonal spread ): BUY CALL APR-25 DLX-DE OI=46 A=$4.38 SELL CALL FEB-30 DLX-BF OI=49 B=$0.50 INITIAL NET DEBIT TARGET=$3.75 TARGET ROI=30% Chart= /charts/charts.asp?symbol=DLX **** BEAS - BEA Systems $84.94 *** Master Of B2B *** BEA Systems is one of the leading providers of cross-platform middle-ware and application server solutions for enterprise applications. BEA's products and services enable mission-critical, distributed applications to work seamlessly in client/server, Internet, and legacy environments. BEA provides transactional, messaging, and distributed object-based software, as well as an industry-leading Java Web application server, for developing and deploying these enterprise applications. In addition to its broad software product line, BEA provides complete solutions to its customers through a full range of services including developing custom components, consulting, training, and support, and BEA's extensive partner network. BEA focuses on four primary product lines: BEA TUXEDO, BEA WebLogic, BEA eLink and BEA eSolutions. Companies that provide software for e-commerce infrastructures are in demand and BEAS is poised to climb to the top of the heap. Recently selected by the Phoenix-Engemann Aggressive Growth Fund, Bea Systems is on a short list of technology issues that have demonstrated top-line expansion and have solid long-term growth prospects. The most recent brokerage analysis comes from First Boston and in late January, they reiterated their STRONG BUY rating, based on higher-than-expected revenues and EPS in the quarter. Another popular technology research company, SoundView also rates BEAS a STRONG BUY, citing the possibility of several future deals with large corporations. We simply favor the bullish technical outlook and the favorable option premiums for this deep in-the-money debit position. PLAY (conservative - bullish/debit spread): BUY MAR-50 BRQ-CJ OI=62 A=$36.38 SELL MAR-65 BUC-CM OI=68 B=$24.25 INITIAL NET DEBIT TARGET=$11.88-$12.00 ROI(max)=25% B/E=$62.00 Chart= /charts/charts.asp?symbol=BEAS **** TUP - Tupperware $16.80 *** Reader's Request! *** Tupperware is a multi-national company engaged in the manufacture and sale of Tupperware consumer products for the home. The core of Tupperware's product line consists of food storage containers, which preserve freshness through their patented Tupperware seals. The company also offers a line of children's educational toys, serving products, and gifts. Products also include colanders, tumblers and mugs, mixing and serving bowls, serving centers, microwave cooking and serving products, and kitchen utensils. Merchandise is marketed under the Tupperware brand as well as Modular Mates, Fridge Stackable, OneTouch, Rock N'Serve, Meals in Minutes, Legacy Serving and TupperMagic brands. Tupperware relies primarily on the "demonstration" method of sales. Demonstrations, which are sometimes referred to as "Tupperware parties" are held in homes, offices, and social clubs, and allow the customer to appreciate the feature and benefits of Tupperware's products. On Tuesday, the company reported earnings and although they were not sterling, the outlook is favorable. The CEO says he expects a modest increase in sales with a 20% rise in net income in the year 2000. A return to sales growth would please investors and restore optimism in the company's future outlook. To begin that process, Tupperware recently launched an e-commerce feature on its website, and started a re-engineering program expected to boost operating profits significantly by the end of next year. Maybe that's the reason the chart pattern has begun to reverse for the better. One of our devoted readers pointed out this recovery-in-progress and requested a conservative, low-cost position on the issue. A debit spread is the simplest way to profit from a bullish move without stock ownership. In this case, a small disparity in the option premiums will allow us to open the play at a discount. PLAY (conservative - bullish/debit spread): BUY CALL APR-15.00 TUP-DC OI=44 A=$2.62 SELL CALL APR-17.50 TUP-DW OI=264 B=$1.12 INITIAL NET DEBIT TARGET=$1.38 ROI(max)=81% B/E=$16.38 Chart= /charts/charts.asp?symbol=TUP ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ See Disclaimer in section one ************
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